Sustained Oil Price Growth, Mixed Hope for 2019 Budget

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Business/Economy Page

If global oil price sustains its growth, Nigeria may find it comforting in implementing the benchmarks of 2019 budget, provided things go well with production levels, writes Chineme Okafor

Oil prices have continued to rise after member countries of the Organisation of Petroleum Exporting Countries (OPEC) announced their intention to continue on the voluntary supply cuts they agreed to roll over in 2018, but Nigeria’s production level has not followed the same direction.

To underscore how significant the OPEC-led supply cut has been, recently, crude oil prices rose marginally, driven by comments from Saudi Arabian oil minister, Khalid al-Falih, that an end to the voluntary cuts was unlikely before June. This equally indicated that the cartel and its allies led by the Russian Federation could consolidate the successes they’ve reportedly made in this regard.

Based on the January 2019 report of the Joint Ministerial Monitoring Committee (JMMC) of the OPEC and non-OPEC producers, there has been significant progress in adherence to output cut they agreed. The JMMC explained that the overall conformity level of the participants since the beginning of the ‘Declaration of Cooperation’ in January 2017 has been well above 100 per cent, specifically levelling at 116 per cent.

With Nigeria participating in the voluntary production cuts, meeting the oil production targets in her 2019 national budget may however become challenging if she opts to push for more barrels in line with the 2.3 million barrels (mb) proposed in the national budget.

Price Movement

Based on oil market highlights provided by the OPEC in the March 2019 edition of its Monthly Oil Market Report (MOMR), its reference basket rose in February for the second consecutive month, improving by about nine per cent or $5.09, month-on-month (m-o-m).

According to the cartel, prices averaged at $63.83 per barrel supported by expectations of tightening oil supply in the coming months amid increased unplanned outages. The report equally noted that oil futures prices continued on upward trend to reach levels not seen since November 2018, with Brent staying at $4.19, or 7.0 per cent m-o-m higher at $64.43/b, while West Texas Intermediate (WTI) rose by $3.43, or 6.7 per cent to average $54.98/b.

The report equally highlighted that while global economic growth estimate had remained unchanged at 3.6 per cent in 2018 as well as 3.3 per cent in 2019, world oil demand for 2019 is however forecast to grow by 1.24mb/d, unchanged from last month’s projections, and from which total world oil demand is anticipated to reach 99.96mb/d.

Demand for OPEC crude in 2019, however, is forecast at 30.5mb/d, around 1.1mb/d lower than the estimated 2018 demand level.

“The ORB (OPEC Reference Basket) continued to rise firmly in February for the second consecutive month in a row, improving by about 9 per cent, or $5.09, m-o-m to average $63.83/b. The basket value continued to increase during February, reaching $66.56/b, the highest daily settlement since last November.

“This came on the back of strong crude demand for March loading and concerns about tightening oil supply in the coming months, amid rising unplanned outages owing to technical and geopolitical factors. Oil prices also were supported by a more balanced oil market, which was helped by the start of OPEC and non-OPEC production adjustment in January and tightening supply from several regions,” said OPEC in its March MOMR.

It added: “Market sentiments continued to improve in February, given the high conformity levels of the countries participating in the Declaration of Cooperation. However, higher US crude oil exports, refinery turnarounds in several regions, and low refining margins, as well as concerns about slowing global economic growth, limited gains.”

Forecasts

With regards to what the immediate future holds for the oil market, the short-term energy outlook report of the US Energy Information Administration (EIA) also projected that while Brent crude oil spot prices averaged $64 per barrel (b) in February, up $5/b from January 2019 and about $1/b lower than at the same time last year, Brent spot prices will average $63/b in 2019 and $62/b in 2020, compared with an average of $71/b in 2018.

The EIA stated that it expected WTI crude oil prices will average $9/b lower than Brent prices in the first half of 2019 before the discount gradually falls to $4/b in the fourth quarter of 2019 and throughout 2020.

It explained the price increases in February coincided with its estimate that global liquid fuels inventories would fall by 1.4 million barrels per day (b/d), the largest inventory withdrawal for any month since June 2017.

According to the agency, declining estimated crude oil production for February in both the OPEC and the United States contributed to the drawdowns, with U.S. petroleum inventories declining by 17.9 million barrels during the week ending in February 22, 2019. This, it said, was the largest one-week decline since 2011.

“Despite high price volatility during the past year, Brent crude oil prices as of the first week of March were at essentially the same levels as in March 2018.

“Notwithstanding the strong draw in February, EIA forecasts that global liquid fuels inventories will rise by 0.2 million b/d in 2019 and by 0.4 million b/d in 2020. The March STEO’s (short-term energy outlook) expected inventory builds in both years are lower than the forecast in last month’s STEO. The lower forecast inventory builds reflect lower expected crude oil production in both OPEC and the United States.

“Saudi Arabia cut crude oil production by more than expected in February, with production averaging 10mbd, and EIA assumes that joint OPEC/non-OPEC crude oil production cuts will remain in place through the end of 2019,” said the EIA report for March.

It added: “In addition, the U.S. active oil rig count reached a 10-month low of 834 rigs as of March 8, suggesting the rate of U.S. crude oil production growth could slow.

Even though U.S. crude oil production is estimated to have remained near 11.9mbd for the past four months, EIA still forecasts U.S. crude oil production to increase by 1.3mbd in 2019 and by 0.7mbd in 2020.

“OPEC and U.S. production levels, as well as the pace of global oil demand growth, present considerable uncertainty to oil market balances and price expectations. Based on the current forecast, however, EIA expects global inventory builds and rising OPEC spare capacity will limit significant upward oil price pressures in 2019 and in 2020.”

Nigeria’s Situation

Having prepared its national budget for 2019, and benchmarked oil prices in the budget at $60 per barrel with crude oil production of 2.3mbd, the development gives Nigeria some comfort in prices, but not with her production levels.

According to the OPEC March MOMR, Nigeria’s oil production within the last three months has not really grown beyond 1.7mbd, indicating that even if prices maintain healthy growth, the country’s limited production levels would still remain an issue for consideration.

In the MOMR, Nigeria produced 1.733mbd of oil in December; 1.731mbd in January; and 1,741mbd in February, indicating just about 10,000 barrels a day difference between January and February 2019 production.

Industry experts, who spoke to THISDAY on the development, maintained that there could be price fluctuations within the year, but they would largely not tilt to extreme ends. However, they stated that besides the about 200,000bd Egina floating production storage and offloading (FPSO) oil field, Nigeria would likely not have new capacities added to her oil production levels.

According to their analysis, if the Egina FPSO comes on stream with 200,000bd of oil, it could at best push Nigeria’s oil production to about 1.9mbd, but not the 2.3mbd the country had benchmarked in her 2019 budget.